Okay, let's go ahead and get started. I'm George Tong. I cover business and information services here at Goldman. I'm really pleased to be joined by Noémie Heuland, CFO of Moody's. Noémie, thank you for being here with us today.
Thank you for having me.
So, Noémie, as Moody's new CFO, can you describe your top financial priorities for the company and perhaps how you expect to run the company differently than your predecessor?
Yeah, so as you said, I joined in April, so just completing eight months, and it's been a great year to join. I'm sure you've all seen our results for the past quarter: 41% revenue growth, adjusted diluted EPS growth of 32%, so it's been a very great year so far, and I'm very pleased to be here. I think my priorities as a CFO, and I think they'd be very consistent with Rob's and the rest of the leadership team's priorities, really to make sure we allocate resources and capital to fuel and capture the growth of our business and capture the demand drivers that we see across our two businesses. We have a tremendous issuance environment, as I just mentioned. We have opportunities in private credit. I'm sure we'll talk about this in transition finance.
We're working with our analysts to really make sure they can capture those opportunities on the rating side. On the MA side of our business, we also have a pretty significant long-term demand drivers for our businesses with the digitalization of bank workflows, insurance workflows. Our research business is one of the largest fixed-income research in the world, very powerful, and I'm sure a lot of you here in the room are using it. We have our data estates that we've built across the past 115 years. We not only have $74 trillion of rated debt, but we also have economy time series, data around corporate hierarchies, properties, people, etc., that we then can feed into our algorithm and workflows to help people make decisions about risks that they're undertaking.
So there's a lot of opportunities to not only continue to build that with our existing customers, but also expand or land new customers in the corporate sector, and so that's what my team and I have been really focused on, is understand where to put investments to really capture not only continue to do what we do very well, which is maintaining our agency of choice in the ratings business and giving tools to our analyst population to do what they do best and spend maybe less time on non-core activities, but also equip our MA sales people, our product group, and work with our corporate development team to really allocate dollars to serve the needs of the corporate and expand our presence with financial institutions.
Right. Makes sense. Now, Moody's is guiding to approximately $1 billion in buybacks this year, which is the highest level it's been since really 2015. Where would you say share buybacks fit on the overall spectrum of capital allocation? And what are your overall capital allocation priorities?
Yeah, we've increased our guidance for share buyback, by the way, earlier this year. So our capital allocation has been pretty balanced over the years, and I think it's my intent and the intent of the rest of the leadership team to continue in the same mindset. We first allocate capital to fuel growth. I talked about a lot of the demand drivers across our two businesses. And so that's really where we are focused on in investing for growth. And then we have a pretty steady dividend increase policy each year. And then the rest is share buybacks such that we overall return a large amount to our shareholders. But if I go back to the growth, you've seen us this year. To illustrate what I said, we've made some investments in our business.
We've talked about $60 million of investments earlier this year across mostly in our MA business, but also in our ratings in technology. And we've acquired a few, we've done a few bolt-on M&As in MA to increase the breadth of our capabilities to serve different workflows. We've acquired the remaining stake in the leading African rating agency, GCR, to help us continue to increase our presence in domestic markets, so those are recent examples of where we've made some investments to fuel our growth.
Yep. At Moody's last Investor Day in 2022, the company established some medium-term targets that included 10% plus revenue growth, low 50s operating margins, and low double-digit EPS growth. What are your thoughts on those targets?
Yeah, if you think of stepping back on where we are three or so years after publishing those targets, I think we've kind of checked the mark. And a lot of those, if you think about the MCO revenue growth, we're probably there now. If you think about MIS, adjusted operating margin is close to 60% this year. We're guiding a little bit shy of that. Adjusted EPS growth has been way within the guidance that we've set for the medium-term target. So we've accomplished a lot, and I think it's very well balanced between the growth and profitability story between the two businesses. Now, if I think about MA specifically, we still have obviously some room to grow and to get to what we've outlined in the medium term.
The way I like to think about the Moody's Analytics business is really to think about Decision Solutions, which is about $1.4 billion of ARR. It's already growing at the medium-term target level, so this is where we have workflows for banks and insurance. We have KYC that's going north of that, and we have opportunities to expand that into the corporate, so that's really where a lot of our investments are going, not only in the workflows themselves, but in our data estates as well to feed those workflows. Then we have the largest fixed-income research business, that's about $800 million in ARR. That's growing at mid- to high-single-digit. That's a very mature business. I think that's kind of probably a good proxy for the growth rate of that business.
And then you have the Data and Information somewhere in between in the high single to 10%-ish level. So that's how I like to think about it for MA. And again, we've seen a pretty sizable growth in our workflow and data solution business.
Makes sense. Let's dive a little bit further into the MIS business. So recently, with Q3 results, Moody's increased its MIS revenue growth outlook from high teens to high 20s, reflecting not only the strong performance in the third quarter, but also an improved outlook for 4Q. Where do you see the most positive momentum as you look at the debt issuance landscape? And are there any areas of concern that really pop out for you?
Yeah, and we can talk about 2024, but I think we all know where we've published our guidance in the third quarter. We all know how the issuance environment has been since then. So maybe I'll zoom out a bit and talk about how we're framing our thinking for the year to come and beyond. There are a few pretty strong demand drivers for ratings, so we're pretty constructive about the growth prospect of that business. Obviously, economic growth is the most important. We expect around 3% GDP growth for the U.S. next year. So that should bode well for the issuance environment. Spreads at our all-time low. We have recently published our default rate study. We expect the investment grade default rate to come down in 2025 to about 2.8%-ish mid-year. So that should, again, be a good indicator for the trends in spreads. That should remain tight.
All of those factors are constructive for issuance. The volume of M&A financing related to M&A has been still subdued versus historical levels. There's a lot of dry powder at private equity firms. Corporates are sitting on a significant amount of cash. We'll have to see what the antitrust environment looks like under the new administration, but we think there's a constructive environment for M&A. As a matter of fact, we have what we call a rating assessment services business, which is a pre-analysis around potential M&A transactions and how those transactions would affect the credit profile of a given issuer. That business is usually a good proxy for what the M&A finance volume is going to be going forward, and that business has been going very well. Those are overall constructive environments.
And then the last thing I haven't touched on, on the maturity wall, we've published our study in September. We see a significant growth in the maturity wall, especially in spec grade, around 19% of the four-year maturity wall in spec grade. So there's been some pull forward this year of spec grade issuance. People have gone ahead of the potential election volatility. The spreads have been tight, but the volume of spec grade maturity has been going up such that if you think about the one-year forward maturity in spec grade, it's actually the same amount in absolute dollar value than what it was last year. So yes, there's been some refi, but the underlying volume of debt is going up. So obviously, again, very conducive to the issuance environment for next year and beyond.
Maybe sticking on the topic of issuance for next year, how do you think about the impact of a Trump administration on the debt capital markets? What could it mean for, I guess, the broader macro and issuance environment? And how do you think about ratings performance in that backdrop?
Yeah, I think so the first thing I'd say. We've been around for 115 years. We've been working through the different cycles, and we've been kind of performing. We've been administration agnostic, so to speak. I think what matters really for our business, as I said earlier, is the underlying economic growth. Again, as long as you have GDP growth, that's usually our business is following the trends of GDP growth. So as long as there's economic growth, that should continue to be constructive for us. I talked about M&A. I think what's yet to be seen is whether there's going to be any change in the stance towards antitrust and whether that's more conducive to larger M&A, which obviously would be a positive for our business. Then regulations, I think we talked a lot about regulations. We're a regulated business.
I don't think there's anything around the regulation for rating agencies in the U.S., so that shouldn't have any effect on our business.
Right. And then let's switch gears and talk a little bit about the refi pipeline. You touched on this earlier. There has been a pull forward in both investment grade and high-yield issuance, a little bit more in spec grade, a little bit less in investment grade. So you sort of see the two balance out. And I think previously you'd mentioned that if you look at the one-year forward issuance pipeline, refinancing pipeline, it's up something like mid-teens. So how much visibility does the refi pipeline give you for 2025? How much debt issuance would you say is in the bag because of the refi pipeline?
Yeah, so we look at the maturity wall pretty extensively. There's a lot of sophistication that goes within my team and the ratings business to look at the maturity walls and the trends. If you think about Investment Grade, there's maybe more opportunistic issuance. If you think about a CFO, they're usually typically planning 12-18 months ahead, and you always have capital market access. So there's maybe less pull forward there, as you pointed out. Now, in spec grade, as I said, we've seen a lot of pull forward this year, but we also have a significant increase in the maturity walls for the spec grade, 19% spec grade maturity wall over the next four years. So that's obviously positive for our business. And if you think about the one-year forward maturity, they're at the same level as they were last year.
And then the other thing I would say is if you look at those maturity walls, the highest year is 2028 for both Europe and the U.S. And I think about a third, 25% to a third of that debt was issued in 2023 at the time where rates were elevated. So there's obviously opportunity for that to be pulled forward if the rates environment continues to decline.
Right. Now, the refinancing pipeline is not only strong for 2025, but also quite strong for 2026. To what extent could there be a pull forward from 2026 into 2025 that would lift 2025 debt issuance? And what would be the circumstances that would cause that to happen?
Yeah, we typically have in year, if you think about any given year, there's always pull forward from the subsequent years, and I've talked a bit about the dynamic between spec grade and investment grade, and I don't think there's going to be any difference next year versus what we've historically seen, especially if spreads remain tight.
Got it. Private credit, big topic for many investors and for Moody's. It's been gaining momentum in recent years. How do you expect private credit to impact ratings revenue at Moody's and MA revenue to the extent that there's impact there as well?
Yeah, so we definitely view private credit overall as a tailwind for our business. That might be a bit different from what we thought 18 months to two years ago, where we maybe were a bit more on the defensive side. I think there's two parts to that market, and one is what people know very well as the leveraged direct financing, which is about $1.3 trillion expected to go up to $3 trillion. So that's what people kind of know about private credit. And the other part that's very interesting, if you listen to Apollo and Blackstone and the other large players, is all the asset-backed finance and everything that's sitting on the bank balance sheet. And that market, if you listen to Rowan, those guys they view it as $20-$30 trillion. And we're already servicing the players in that market already today.
We've actually nominated. We've created a private equity, a private credit-specific team that's co-head. The head is the co-head of the FIG franchise as well. She has visibility across all the different asset classes of our ratings franchise to understand where the flow is coming from. Because today, as I said, we already rate some portfolio companies of those funded by those big private equity players. We also have a fund finance franchise that mostly falls under our FIG ratings group with subscription lines, NAV, rated feeders, et cetera. We rate portfolio companies. As I said, we have the largest leading, what we think is the leading franchise in BDCs. We already serve the market today. For us, what's important is to make sure we continue to evolve our methodology. We have the staff that's trained and skilled to address the needs of that market.
We also understand where the flow is coming across those different asset classes, which is why we've established that practice.
Makes sense. We talked about some of the puts and takes with 2025 debt issuance. If you look longer term, what would you say is a reasonable medium-term growth rate for MIS revenues? And what mega trends do you think will serve as key growth drivers?
Yeah, we've published our medium-term targets for MIS, and I think, as I said earlier, we have the different components. Obviously, economic growth is really the main driver. We have some pricing increase as well, and the way we look at pricing is really on the value base from an issuer standpoint, so we have different pricing mechanics depending on the asset class, depending on the frequency that an issuer is coming to market. I'm sitting on the pricing committee. We have monthly pricing reviews and quarterly reviews where Rob is involved as well, so that's a component of our growth algorithm, and then the rest to get our medium-term target is really the incremental revenue coming from the areas I talked about, which is private credit, transition finance, domestic financing, so all those combined really get us to our medium-term target for ratings.
Right. Makes sense. Now, MIS operating margins are currently running in the high 50s%. To what extent do you think margins can expand further from current levels? And what are the drivers?
Yeah, it's a great operating leverage. We're getting shy of 60% for this year. We're not far from our medium-term target already. What we're really working on with Mike West, who's leading our ratings business and the rest of the team, is to try to become volume agnostic within a certain issuance band, and what I mean by that is if you think about a year like this year, we've made some investments in the past such that we didn't have to increase our staffing, our ratings and analyst staffing dramatically to face, and we're able to absorb and face the demand of such an environment as we saw this year, so the reason we were able to do that is because we've invested heavily in our technology. As you can imagine, we're a 115-year-old company.
We have a lot of different tech systems that required to be upgraded or enhanced such that analysts can really spend time on ratings, research, talking to the market participants, as opposed to pulling, going through the workflows or spending time inputting the same data entry into different spreadsheets. So there's been a lot of investments in tech that have been going on in MIS to really help us be what we like to call volume agnostic and really help analysts increase their portfolio load within, obviously, the parameters that are set by a regulator. We're heavily regulated. So as you can imagine, in the U.S., but also ESMA in Europe is really looking at how we staff and how we respond to the demand with our skill sets.
Right. Let's switch gears and talk a little bit more about Moody's Analytics. Most recently, if you look at the Data and Information subsegment of MA, ARR decelerated a little bit from low double digits to high single digits. I think the impact cited were the election cycle affecting government spending. You also had the impact of the MSCI partnership. So how long lasting do you expect these headwinds to be? And is there a path for Data and Information ARR to get back to that low double digit range?
Yeah, you mentioned so Data and Information is all the revenue under subscription that comes from our data feeds, our data estate. We've had, as you pointed out, a few government contracts that renewed at a lower rate in the third quarter. The universe of those contracts is known. We've accounted for those aspects in our third quarter and the full year guidance. So there's no more to be expected there. We also signed a very exciting partnership with MSCI earlier this year, whereby we embed, we use their ESG content and sourcing and scores in our product as opposed to customers sourcing them from Moody's directly. And so customers who may have bought been having contracts for both are now sourcing those data needs with MSCI. And so that's why you saw a little bit of erosion in pipeline. But again, that's contained.
I think we have a good grasp of what that looks like. What we're really focusing on in the Data and Information part of our business is keeping our edge versus competitors in the depth and breadth of our data. We're investing in curating those data estates, cleaning it, standardizing it so that it can be used across different use cases beyond what they're being used today. If you think about KYC, now we have the ability to expand into the corporate sector where we have a very low penetration today because we've done a lot of work around our data to serve those specific use cases. Trade credit as well. So there's a lot of exciting opportunities to continue to feed our data into existing workflows or our own workflows within Decision Solutions.
Right. And then within MA Research and Insights, you're also seeing a little bit of headwinds there from both the buy side and the sell side, asset managers and banks expressing some budget difficulties. Similar question, when would you expect the environment there to improve? What are the catalysts? What's the timeframe?
So for Research and Insights, we've talked about the attrition that we've seen early 2023, early 2024. That really is what drove a bit of a deceleration of growth in that. I think, again, we're past that. We've accounted for all those attrition events earlier in the year. We're pretty excited about our Research Assistant product that was launched last year. We've made some significant stride with the lower players in the market, like smaller asset management firms. We have a lot of pipeline with large financial institutions. We've been working with them also to help them build and establish their own framework around the use of GenAI. As you can imagine, similar to us, we're regulated. Our customers are regulated.
They have to make sure they have the right framework and governance around GenAI, which is one of the reasons why it's maybe taken a little bit more longer time than we expected before we started to get traction on those large transactions. But we're making good progress, and we have a lot of exciting things happening right now and that we expect also. We have a strong pipeline for next year there. Again, I think we've seen some tight purchasing pattern of bank and asset managers. I would say, though, if you look at our banking ARR in our Decision Solutions workflow, it's been growing at 9%-10% since early 2023. There's a lot of demand drivers around for banks as they're going through their digitalization journey, not only to be more efficient, but also effective.
I mean, you've heard some of the fines around the KYC for some of the large banks. So we help customers, and we have a lot of attention and traction and pipeline as a result of those types of events. So we have a lot of good discussions now with banks around growth and maybe less so around risk and resiliency and expense control as we had about a year ago. So that's encouraging signs.
Yes. Let's talk a little bit more about GenAI. You touched on Research Assistant. That certainly sounds like it's gaining a lot of good traction. Can you talk about the pipeline for GenAI, what additional products they have in development, and what has overall customer receptivity been broadly to GenAI?
Yeah, if I maybe just on Research Assistant, again, which we launched about a year ago, a few interesting stats around that. We've seen our NPS score for customers using Research Assistant to be about 20 points above customers using just the CreditView without their GenAI capabilities. We've seen a sizable increase in research consumption, which at the end of the day is a good tailwind for subscription research business. We've also seen the average deal size for Research Assistant to be higher than the regular CreditView deal size by a factor of 3x or 3.5x. So those are encouraging signs. Obviously, still moderate contribution to revenue growth for the reasons I talked about in terms of timing of implementation of the GenAI framework.
But I think what those products do is it elevates the narrative and the dialogue with our C-suite, whereby before we may have been focused on selling one specific product to address one specific use case for one specific persona at a financial institution, whereas now Rob is having more comprehensive dialogue around efficiencies, effectiveness, controls, and resiliencies with large banks. And GenAI is a strong driver for value generation there. If you think about labor, the share of labor versus agentic AI. So there's a lot of interesting dialogue going on there. Now, to your question about what else is in the pipeline, we've launched Automated Credit Memo also in the same vein.
We have Early Warning Systems, which take any piece of data, any information, for example, a news event around a retailer exiting a specific location or state and having the ability to immediately model what that means in terms of lease portfolio exposure, and potential losses as a result of reduction in occupancy rates. You can do that in the span of seconds. That's one of the examples that now we're not only selling initially to our insurance customers, but also now to banks for them to assess their potential losses on their portfolio. We think about this in kind of being pretty consistent across all of our solution sets.
Right. It seems most of the GenAI products are sitting in the MA segment. What kind of role do you see GenAI playing in the MIS business? Is it really just a productivity enhancer, or are there some potential revenue benefits there as well?
So most of our GenAI capabilities that we commercialize are all in Moody's Analytics. But we're also looking at, and we're pretty excited about the outcomes of our AI-generated ratings in our ratings space. We're obviously using that in parallel to our traditional ratings, but we're getting in front of it. We're building an understanding of how those algorithms are predicting and projecting credit score or credit ratings so that when and if the customers at one point in time want an AI-generated rating, we're ready and we have the skill sets and capabilities to do it. Obviously, we're regulated, as I said. So we're working with our regulators, and we have very frequent dialogue. Mike West is there talking to them frequently to understand and for them to understand what we're doing with GenAI in our ratings.
I think in terms of, so that's just for the kind of the ratings part of our and the use of GenAI with respect to ratings. I think, as I said earlier, a big opportunity for us, which we've been investing in over the course of the past three years, four years, is around the underlying workflow technology from the time a research document is pulled to inform a rating to the time it gets published on moodys.com. There's a lot of different systems and interfaces. So we're working to streamline that, automate it, and then potentially use GenAI as well to facilitate the work that's done by our analysts so that they can spend more time with the market participants and in credit ratings committee and so on and so forth.
Makes a lot of sense. I'm going to pause there and see if there are any questions from the audience before I continue. We have one there. Let's wait for the mic.
You mentioned the NPS score when Research Assistant is across the country, that you're probably having a better relationship. Can you talk generally about how your cross-sell levels and also?
You mean it's for the research assistant specifically or in general?
Yeah. Basically, is there a fairly significant opportunity inside the cross-penetration of the current client base?
Yeah. So that's a very interesting theme, and I'm very excited about that. Actually, that's coming from a software space where in SaaS where you have actually build it once and sell it multiple times. So yes, the answer is absolutely yes. There's a lot of opportunity to cross-sell, not only to our existing banking customers, but also selling some of the MA solutions and workflows initially built for the insurance customers into banks now. Think about understanding of the impact of significant weather events or climate change into the portfolio of property assets or commercial real estate, as an example. So that also has very strong interest for banks. So that's an example of a cross-selling opportunity to cross-sell across different customer segments.
We've done a lot of investment in our infrastructure and our platform to make it easier for customers to access our workflows and having the same single sign-on, same point of entry. So that's part of what I've talked about the $60 million of investments we've made in February. Some of it went into our platform so that we can actually enable cross-selling across different customer segments.
Great. Any other questions? Okay. Let's return to our conversation on GenAI. We touched a little bit on monetization, but can we dive a little bit more into potential ways you might look to monetize GenAI? Is this a cost plus? Is this an add-on? Is this an upsell? Consumption-based pricing, what are your thoughts there? And then how much impact or lift to revenue do you think GenAI can provide over the near term and over the medium term?
Yeah. I think as we with Research Assistant, we initially took the stance of an increase, an uplift to our existing pricing. We're obviously piloting that, see how that resonates, and we'll continue to evaluate that. I think what I've noted in my conversations with CFOs and customers is really about value-based pricing. And it's not so much about the price of the product itself, but it's also what is the business case around the investment and how much labor efficiency or efficiency am I going to get in the execution of my own workflows by implementing the tool. And that's where the pricing discussions come in in terms of how much ROI. So it can vary depending on the different customers. So that's how we're approaching it.
Now, in terms of the roadmap or how we're thinking about the framework longer term, and maybe I've talked about Research Assistant, which is what we call a navigator. So it helps customers accessing and using our existing tools in a more efficient way. Then you have a bit more sophisticated, what we call skills, which are models that embed GenAI capabilities. So think about some of the models within RMS, as an example, or some of the things that I talked about in the Early Warning System. And then the end of it is the agents, which are really going to replace workforce in the execution of workflows. I think we're still some time away from that, but that's really where we're investing to really build workflows, agentic workflows that can replace significant labor costs. And that's what our customers are really excited.
Those are kind of where the discussions are leading today.
At this point, would you say it's still too early to measure the materiality in revenue impact? It's less than 1%?
Yeah. We haven't quantified how much. And the other thing I would say is we've always had some sort of AI, artificial intelligence embedded in our products. So I think we're taking that to the next level. As part of our existing revenue base, we already have some pretty sophisticated AI capabilities in our credit default model, our climate-related risk management tools, etc. So it's not new. We're just taking it to the next level. And I think you'll see us provide more color on that over the next few quarters.
Makes sense. And then last question on MA margins. This year, you're guiding to segment margins in the low 30s, which is relatively stable and unchanged from 2023. How do you think about the puts and takes with balancing reinvestments in MA with driving more margin flow-through?
Yeah. For this year, we've made a conscious decision to invest in GenAI capability platforming as well as product capability. So that's why the margin has been relatively flat versus last year. We've guided to mid-30s% for our MA margin. And I think there's potential to go beyond that in the outer years. I mean, it's a great business model. You sell it. You build it once. You sell it multiple times. You have cross-sell opportunities, and then you have additional expansion or landing new customers in the corporate, which will largely leverage the existing workflows and infrastructure with a bit more tweaks on the data state, etc. So there's opportunities to take that forward, and we're committed to that. We're already leveraging a lot of tools internally around our customer support, sales prep, go-to-market. We're using GenAI and automation to really increase productivity across the board.
You'll see us continue to do that.
Wonderful. Well, really appreciate the time and the insights. Please join me in thanking Noémie.
Thank you.